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Home / Industry / Retail /  Retail, small biz loans to get pricier as RBI hikes repo rate
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MUMBAI : Retail borrowers, small businesses and a section of corporate customers would now have to shell out more as interest payouts following the monetary policy committee’s decision to raise the repo rate by 50 basis points on Wednesday.

Floating rate loans linked to the repo rate would be automatically repriced, while those linked to other external benchmarks would follow. While new loans on the repo-linked benchmark would immediately see the rate hike’s impact, existing loans would see the change based on their respective reset dates.

Under RBI regulations, banks are supposed to reset the interest rate on loans linked to external benchmarks at least once every three months. This is the second repo rate hike in as many months after the rate-setting panel raised the policy rate by 40 bps in May.

Although some analysts believe recurrent hikes in interest rates would dampen demand for loans, bankers said they are yet to see any significant impact of the May rate hike.

“Given the last hike happened just last month, it is too short a time to judge changes in consumer demand. While we have not seen much of an impact so far, given more rate hikes are expected after June, demand for retail and MSME loans could see some contraction," said a private sector banker on condition of anonymity. He said that if the spate of rate hikes continues, banks might have to tweak the spread on loans to attract new customers.

RBI data showed that 58.2% of all floating rate housing loans and 69.2% of all floating rate small business loans were linked to an external benchmark as of 31 December. Banks have already started raising their MCLR (marginal cost of funds based lending rate)– an internal benchmark – to manage a squeeze in margins. Senior bankers said the liquidity slush in the system led to mispricing of risks, as banks fell over each other to attract well-rated borrowers, sometimes at the cost of margins.

“The higher interest rates will get transmitted directly for loans linked to external benchmarks such as home loans or small and medium enterprise loans. However, MCLRs will be slower to react in terms of quantum of change," said Madan Sabnavis, chief economist, Bank of Baroda.

Sabnavis said that deposit rates would also increase, depending on how banks adjust their rates based on their funding requirements. “As there is surplus liquidity in the system which can go for lending, the immediate response may be slow," he said.

RBI had directed banks to link all new floating-rate personal, and micro and small enterprises loans to an external benchmark from October 2019 and medium enterprise loans in April 2020. Floating rate loans to borrowers from these sectors given prior to the external benchmark regime are also on MCLR, although banks allow switching to external benchmarks for a fee.

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